China faces no big pressure to ease aggressively - c.bank

Chinese one yuan coins and 100 yuan banknotes are seen in this picture illustration taken in Beijing December 30, 2010.
REUTERS/Petar Kujundzic/Files

SANYA, China China faces no big risk of an inflation rebound in 2013, nor any major pressure to ease monetary policy aggressively next year, the head of research at the central bank said on Monday.

Meanwhile, central bank chief Zhou Xiaochuan and one of his former deputies sounded a cautious note on the country's long-term liberalisation of its currency and interest rates.

"I feel that there is no evident pressure for the central bank to take aggressive easing policy," Jin Zhongxia, head of the financial research institute of the People's Bank of China, told Reuters on the sidelines of a forum in Sanya on the southern island of Hainan.

"I think we will not see a big inflation rebound in 2013," he said.

On Sunday, Chinese leaders promised to maintain a "prudent" monetary policy and pro-active fiscal policy in 2013, leaving room for manoeuvre in the face of global economic risks while deepening reforms to support long-term growth.

The central bank cut interest rates in June and July and has lowered bank reserve requirement ratios (RRR) three times since late 2011 to free an estimated 1.2 trillion yuan for lending as part of a year-long programme of policy fine-tuning.

It has since held off on more aggressive easing, opting instead to pump short-term cash into money markets to ease credit strains, a move analysts say reflects Beijing's concerns about a flare-up in property prices and consumer inflation.

Annual economic growth dipped to 7.4 percent in the third quarter, the weakest pace since the depths of the global financial crisis in early 2009, but growth has been picking up steadily since October thanks to a raft of pro-growth policies.

Annual inflation quickened to 2.1 percent in November from a 33-month low of 1.7 percent in October, which analysts said dimmed the chance for more monetary policy easing as the economy recovers steadily.

SOME CONTROLS STILL NEEDED

Central bank chief Zhou Xiaochuan told the Sanya forum on Monday that China is on course to gradually make the yuan fully convertible over time, but he warned that the authorities may have to resume capital controls if a financial crisis erupts.

"We are not saying we will have 100 percent convertibility or no supervision from the regulator but instead we will reserve the right to monitor and restrict capital flows in some sensitive areas," Zhou said.

That included the fight against money laundering, tax evasion and short-term speculative money flows, he said.

"That is to say, we reserve the right to implement special measures to tackle problems under some special situations, such as in a financial crisis," Zhou added.

The central bank wants to achieve "basic" yuan convertibility by 2015. It says China has already made the yuan virtually or partially convertible on capital account transactions, but analysts say it still controls key areas, such as portfolio investment and borrowings.

Meanwhile, Wu Xiaoling - a former vice central bank chief and now senior lawmaker - told the same forum on Monday that there was scope to further liberalise bank lending rates in 2013 by lowering the floor for borrowing costs.

Such a move, following on from an initial liberalisation in the summer, could stimulate borrowing and bolster the economy.

But Wu cautioned about moving too quickly on a further liberalisation of deposit rates.

"As for deposit rate, we should keep the ceiling control in place for a while. Of course we should allow a wider upfloating range for deposit rates, but we cannot do that very quickly, because we have to avoid excessive competition among financial institutions."

The PBOC liberalised the interest rate environment with its June and July cuts to give commercial banks more room to set both lending and deposit rates competitively.

The new rules allow deposit rates to be set as high as 110 percent of the benchmark rate, while the rate on new loans can be as low as 70 percent of the official borrowing cost.

A rush to allow fully competitive, differentiated rates to attract depositors could lead to a price war for capital among China's banks.

The rise of wealth management products in recent years, that pay higher rates of interest than regular deposits and allow banks to use the funds for lending, has created fierce competition in the sector and raised concerns among some analysts and ratings agencies about the risks they might create.

Many economists say the reduction in the officially guaranteed spread between lending and deposit rates hurts bank profitability.

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